Fix My Finances: I'm overwhelmed by debt and don't know what to do

Welcome to Fix My Finances, Yahoo Finance’s personal finance series. Each episode, we take a look at one viewer’s financial state of affairs and offer advice, insight and information on a variety of issues, including how to save more, spend less and pay off lingering debt.

Today’s episode is the second installment with with Corey, a 33-year-old from Atlanta, Georgia. On Corey’s last episode, New York-based certified financial planner, Stephanie Genkin advised him on the risks of borrowing from his 401(k).

Corey ran into some money troubles in his twenties and racked up considerable debt. He filed for bankruptcy in 2008 and has been trying to build back his credit, but his debt and spending habits are getting in the way.

Corey and his wife need to shelve the vacations for a bit and pay down their debt.

Feeling overwhelmed

Corey feels overwhelmed. He and his wife have good-paying jobs and enjoy going out and traveling, but their debt is looming. It’s a situation many Americans find themselves in. According to a recent Gallup poll, 40% of Americans worry about not being able to financially maintain the standard of living they enjoy.

Corey admits his decisions have landed him in this hole. “Barring something unforeseen, I feel as I will always be in debt,” he says. “It’s tough.”

New York-based certified financial planner, Stephanie Genkin says to dig out, Corey first has to wrap his head around the “hard work that needs to happen.”

Deep in debt after college

Corey has earned two college degrees and his wife has one. Together they owe $150,000 in student loans. The good news is they are all federal loans with interest rates lower than 7%—which is much more affordable than private loans.

Genkin says that although it may seem like they will be paying off these loans for a long time, Corey shouldn’t obsess over them. She suggests automating monthly payments to ensure there is never a late payment. By doing so, they will also get a half percent interest rate reduction.

Another benefit to the auto pay set-up? Consistent payments will improve their credit scores over time.

The debt and all the debt

But that’s not all the debt Corey and his wife are facing. There is his wife’s car loan that has a $20,000 balance at a 4.5% interest rate. And Corey took out a $4,000 personal loan from the bank recently to support a hobby. He also owes $3,500 on a loan from his 401(k), and an additional $3,500 on credit cards with an interest rate of about 20%.

The first step, Genkin says, is to focus on his costly credit card debt. Corey and his wife have a small brokerage account and a joint savings account. Genkin says they should be using that money to pay off the most costly debt.

Corey isn’t “getting any interest on the money in the bank,” she points out, “And [he] could be using it to save [himself] heaps of money in interest.”

Burn rate vs. earn rate

The good news is Corey and his wife earn a good living, about $100,000 a year. If they work at it, they can dig themselves out of this debt over time.

Unfortunately, their monthly expenses are going to jump this month. They had been living with friends to save money. However, they recently moved into their own place with a rent of $1,600 a month.

Corey and his wife were hoping to get away this December, but Genkin says put off that trip. Cutting back on big-ticket spending is key. And while discipline doesn’t always come easy, without adopting some self-control he could end up in bankruptcy—right where he was almost ten years ago.

In order to avoid that trap, Corey needs to focus and “buckle down and make [the debt] a priority,” Genkin says.

Want to be a part of this new series? We are looking for people in their 20s and 30s who need a money makeover. Apply here.